Hilltop Holdings(US:HTH)2021-02-17 01:17Part I Business Hilltop Holdings Inc. is a Texas-based financial holding company operating through three primary segments and subject to extensive regulation - Hilltop Holdings is a diversified financial holding company with primary business units in banking (PlainsCapital Corporation) and securities (Hilltop Securities Holdings LLC)192021 - The company operates through three reportable business segments: banking, broker-dealer, and mortgage origination24 - On June 30, 2020, the company sold its insurance segment (National Lloyds Corporation - NLC), which is now presented as discontinued operations26365 Consolidated Financial Highlights (as of December 31, 2020) | Metric | Value (Billions) | | :--- | :--- | | Total Assets | $16.9 | | Total Deposits | $11.2 | | Total Loans (incl. held for sale) | $10.3 | | Stockholders' Equity | $2.4 | Business Segments The company's operations are divided into three core segments: Banking, Broker-Dealer, and Mortgage Origination, each providing distinct financial services - Banking Segment (PlainsCapital Bank): At year-end 2020, this segment had $13.3 billion in assets and $11.4 billion in deposits2830 - Broker-Dealer Segment (Hilltop Securities): At year-end 2020, Hilltop Securities had net capital of $291.2 million, which was $284.2 million in excess of its minimum requirement4648 - Mortgage Origination Segment (PrimeLending): Originated $23.0 billion in closed mortgage loan volume during 2020, with 58.4% related to home purchases585961 Government Supervision and Regulation The company and its subsidiaries are subject to extensive federal and state regulations, including Basel III, CARES Act, and AML Act of 2020 - The company is regulated as a financial holding company by the Federal Reserve Board and exceeded all Basel III capital adequacy requirements at year-end 202090102112 - The CARES Act provided regulatory relief, allowing loan modifications not to be classified as troubled debt restructurings, and the Bank participated in the Paycheck Protection Program (PPP)8184 - The company is managing the transition from LIBOR to an alternative reference rate like SOFR, expected to be completed after 202188230 - The Broker-Dealer segment is regulated by the SEC and FINRA, maintaining minimum net capital compliance at year-end 2020156160 - The Mortgage Origination segment is subject to CFPB, FHA, and VA rules, including "Ability to Repay" and "Qualified Mortgage" rules171174 Risk Factors The company faces diverse risks, including the COVID-19 pandemic, credit risk under CECL, interest rate fluctuations, cybersecurity threats, and geographic concentration - The COVID-19 pandemic poses significant risks, potentially leading to increased credit losses, liquidity constraints, and operational disruptions189193 - Credit risk is a major concern, with the allowance for credit losses potentially inadequate due to CECL implementation and economic forecasts195198 - Fluctuations in interest rates present substantial risk to earnings, affecting net interest income, fixed-income inventory, and MSR asset valuation204205206 - The company's geographic concentration in Texas for banking operations magnifies the impact of regional economic downturns, especially those related to the energy sector226227 - Cybersecurity threats and reliance on technology are critical operational risks, with potential for financial liability, reputational damage, and regulatory penalties214218 Properties The company's headquarters are in University Park, Texas, with most segment locations leased across Texas and other states - The company's main office is in University Park, Texas334 - As of December 31, 2020, the company's segments operated from the following locations: - Banking: 65 locations throughout Texas - Broker-Dealer: 51 locations in 19 states - Mortgage Origination: Over 290 locations in 45 states335336 Legal Proceedings Information regarding material pending legal proceedings is incorporated by reference from Note 21 to the Consolidated Financial Statements - For details on material pending legal proceedings, refer to Note 21 of the Consolidated Financial Statements337 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Hilltop's common stock trades on the NYSE, with significant cash dividends and stock repurchases in 2020, including a tender offer and a new 2021 repurchase program - The company paid total cash dividends of $0.36 per common share in 2020 and announced an increase in its quarterly dividend to $0.12 per share in January 2021342 - In November 2020, the company completed a tender offer, repurchasing 8,058,947 shares at $24.00 per share for a total of $193.4 million328348 - A stock repurchase program authorized in January 2020 was suspended in April due to COVID-19 uncertainty, with a new $75.0 million program authorized in January 2021327329 Selected Financial Data The company's 2020 financial performance significantly improved, with net income nearly doubling due to increased noninterest income from mortgage origination, despite a large provision for credit losses Selected Financial Data (Years Ended December 31) | (in thousands, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | Operations Data | | | | Net Interest Income | $424,166 | $438,979 | | Provision for Credit Losses | $96,491 | $7,206 | | Total Noninterest Income | $1,690,480 | $1,062,817 | | Income from Continuing Operations | $431,281 | $218,987 | | Net Income Applicable to Common Stockholders | $447,836 | $225,291 | | Diluted EPS | $5.01 | $2.44 | | Balance Sheet Data (End of Period) | | | | Total Assets of Continuing Operations | $16,944,264 | $14,924,019 | | Loans Held for Investment, net | $7,544,097 | $7,320,264 | | Total Deposits | $11,242,319 | $9,032,214 | | Total Stockholders' Equity | $2,350,647 | $2,128,796 | | Book Value per Common Share | $28.28 | $23.20 | - The company provides non-GAAP measures such as "Tangible book value per common share," which was $24.77 in 2020, up from $19.65 in 2019357359 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Hilltop's 2020 results were shaped by the COVID-19 pandemic, with record mortgage income offset by significant credit loss provisions, while maintaining strong capital and liquidity - Income from continuing operations applicable to common stockholders was $409.4 million ($4.58 per diluted share) in 2020, a significant increase from $211.3 million ($2.29 per diluted share) in 2019430 - The results were driven by record income from the mortgage origination segment ($408.0 million pre-tax), offset by a large provision for credit losses ($96.5 million) due to COVID-19 economic uncertainties370430448 - The company completed the sale of its insurance segment (NLC) for $154.1 million in cash, resulting in a pre-tax gain of $36.8 million, reported in discontinued operations365394540 - In response to COVID-19, the Bank provided loan modifications and participated in the PPP, funding over 2,800 loans with approximately $487 million outstanding at year-end383388 - Liquidity was enhanced through a $200 million subordinated notes offering in May 2020 and increased use of brokered deposits395629 Segment Results from Continuing Operations Segment performance varied in 2020, with Mortgage Origination and Broker-Dealer segments showing significant income growth, while Banking income declined due to increased credit loss provisions Income (Loss) from Continuing Operations Before Taxes by Segment (in thousands) | Segment | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Banking | $103,474 | $182,207 | (43)% | | Broker-Dealer | $115,639 | $89,762 | 29% | | Mortgage Origination | $408,044 | $64,721 | 530% | | Corporate | $(63,287) | $(54,405) | (16)% | - The Banking segment's decline was driven by an $89.0 million year-over-year increase in the provision for credit losses, reflecting CECL adoption and the COVID-19 economic outlook454473 - The Mortgage Origination segment's record results were fueled by a 47% increase in loan origination volume to $23.0 billion and an increase in gain-on-sale margins to 406 bps from 324 bps in 2019504506511 Financial Condition The company's balance sheet expanded in 2020, with total assets growing to $16.9 billion, funded by a $2.2 billion deposit increase, and a significant rise in allowance for credit losses Key Balance Sheet Items (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $16,944,264 | $15,172,448 | | Loans Held for Investment, net | $7,544,097 | $7,320,264 | | Allowance for Credit Losses | $149,044 | $61,136 | | Total Deposits | $11,242,319 | $9,032,214 | | Total Stockholders' Equity | $2,350,647 | $2,128,796 | - The allowance for credit losses increased by $87.9 million, reflecting a $12.6 million transition adjustment for CECL adoption and a $96.5 million provision during the year584600 - The allowance for credit losses as a percentage of total loans held for investment increased to 1.94% at year-end 2020 from 0.83% at year-end 2019601 - Total deposits grew by $2.2 billion, or 24.5%, driven by increases in both noninterest-bearing and interest-bearing accounts, including brokered deposits6191029 Liquidity and Capital Resources The company maintained strong liquidity and capital in 2020, with increased cash and all regulatory capital ratios for both the holding company and the bank remaining well above minimums - Hilltop's (parent company) cash and cash equivalents increased to $374.8 million at year-end 2020 from $105.6 million at year-end 2019627 Hilltop Holdings Inc. Regulatory Capital Ratios (as of Dec 31, 2020) | Ratio | Actual | Minimum Requirement (incl. buffer) | | :--- | :--- | :--- | | Common Equity Tier 1 | 18.97% | 7.0% | | Tier 1 Capital | 19.57% | 8.5% | | Total Capital | 22.34% | 10.5% | | Leverage Ratio | 12.64% | 4.0% | - PlainsCapital's capital ratios were also strong, with a Total Capital ratio of 15.27%, classifying it as "well-capitalized"6541129 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, managed through hedging strategies, particularly for the asset-sensitive Banking segment and the MSR portfolio - The Banking segment is asset sensitive, with a simulation estimating a 100 basis point parallel upward shift in interest rates would increase net interest income by 0.89% over the next 12 months704707 - The Mortgage Origination segment uses forward commitments to sell MBSs and other derivatives to hedge interest rate risk on its mortgage loans held for sale, IRLCs, and MSR asset719720 - A 10% adverse change (increase) in the constant prepayment rate assumption would decrease the MSR fair value by an estimated $5.6 million1025 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with a prior material weakness successfully remediated - Management and PricewaterhouseCoopers LLP concluded that the company's internal control over financial reporting was effective as of December 31, 2020729730 - A material weakness related to the allowance for loan losses process, identified in the 2019 10-K, was remediated as of December 31, 2020731 Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accounting Fees Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - The information for Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees and Services (Item 14) is incorporated by reference from the registrant's 2021 Proxy Statement736737738739740 Part IV Exhibits, Financial Statement Schedules This section contains the company's consolidated financial statements and a list of exhibits filed with the report, with financial statements beginning on page F-2 - This part includes the consolidated financial statements for Hilltop Holdings Inc. and the corresponding report from the independent registered public accounting firm743 - Item 16, Form 10-K Summary, is noted as 'None'744